Should I write a covered call or sell a cash-secured put on an elite-performing stock or ETF? I use both but slightly favor covered call writing. Both have worked quite well for me over the past (nearly) 3 decades. On 11/16/2023, I thought it would be instructive to select a stock from our premium watch list and calculate initial covered call writing and cash-secured put returns. I (randomly) chose Pinterest, Inc. (NYSE: PINS) and used 2 strikes out-of-the-money (OTM) from current market value at the time of the trades.
PINS Option Chain on 11/16/2023 for the 12/15/2023 expiration
- PINS is trading at $31.60 on 11/16/2023
- OTM call strike ($33.00) and put strike ($30.00) will be evaluated. Both are 2 strikes from current market value
- Red circles show more than adequate option liquidity (open interest)
- Bid prices are $0.61 (brown cell) for the $33.00 call and $0.44 (green cell) for the $30.00 put
PINS: Covered call writing initial calculations using the BCI Trade Management Calculator (TMC)
- The 30-day return (if taken through contract expiration) is 1.93%, 23.49% annualized (brown cells)
- The breakeven price point is $30.99 (yellow cell)
- Upside potential if PINS moves up to or beyond the $33.00 strike is 4.43% (green cell), creating a maximum 30-day return of 6.36% (without exit strategy intervention)
PINS: Cash-secured put initial calculations
- The 30-day return (if taken through contract expiration) is 1.49%,18.11% annualized (brown cells)
- The breakeven price point is $29.56 (yellow cell)
- If exercised, PINS will be purchased at the breakeven price point, a discount of 6.46% (green cell) from the price when the trade was executed (without exit strategy intervention)
Discussion
Both strategies offered reasonable 1-month and annualized returns. Returns were slightly higher for covered call writing, which also offered significant upside potential. Cash-secured put initial returns were also significant and offered greater protection to the downside with a lower breakeven price point. Both are solid initial trades, with covered call writing being more aggressive and put-selling more defensive.
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Alan,
Do you ever place a stop loss order on your covered call trades to sell shares when the price is going down?
Thanks and love your work.
Stuart
Stuart,
In our covered call trades, there are 2 legs, long stock and short call.
The long stock (we own the shares) protects the short call contract obligation, because we know our cost basis, so we can’t sell our shares and still retain the risk of the short call. Brokers won’t even permit this for most retail investors unless given this high-risk level of approval.
However, we must always place a “stop loss” on the option side, using our 20%/10% guidelines. This where we buy back the short call when the option value reaches a certain price threshold.
If the short call is closed, we can then evaluate our trade for next steps based on our exit strategy arsenal opportunities.
Bottom line: In our covered call trades, the “stop loss” is placed on the option side.
Alan
Alan,
I heard you speak in Las Vegas recently and you mentioned that you use both weekly and monthly options.
If annualized returns are greater for weeklys, why would we use monthly options? What am I missing?
Thank you.
Irwin
Irwin,
Both weekly and monthly expirations can be significantly successful. There are pros & cons to both.
You have identified one of the advantages of weekly options … the potential for greater annualized returns. Another is avoiding weekend risk. There are more.
Monthly expirations also have advantages, greater liquidity, a larger pool of securities to choose from and more time for exit strategy execution, to name a few.
Bottom line: Both work and I, personally, use both weekly and monthly expirations for both calls and puts, slightly favoring monthly expirations.
Alan
Premium Members,
This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor Premium Member site and is available for download in the “Reports” section. Look for the report dated 03/15/24.
Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them on The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:
https://www.youtube.com/user/BlueCollarInvestor
Reminder: Premium Member’s pricing is locked into your current rate and will never see a rate increase as long as the membership remains active.
Best,
Barry and The Blue Collar Investor Team
Alan,
I was looking over the stock report that came out last night and noticed that 2 of my stocks are still listed as eligible but are no longer in bold.
Does this mean we should use in the money strikes for protection or is it okay to use out of the money strikes?
Thanks,
Lou (loving this stuff!)
Lou,
Last week, the market was down 0.13%. This impacted the technical parameters of our stocks, causing some to go from “bold” (all bullish) to “mixed”.
Most of our eligible stocks from the recent report showed mixed technical indicators. The “moneyness” (OTM or ITM) of our strikes is mostly based on our overall market assessment and our personal risk-tolerance.
If we are bullish moving forward, we favor OTM calls; if bearish, ITM strikes.
For me, I’m still leaning bullish and will up set up my (multiple) option portfolios, today, favoring OTM strikes 2-to-1 over ITM strikes.
Alan
Hi Alan,
Is there a way to measure the risk in a covered call trade? I understand that these strategies are low risk, but how much risk?
Appreciate any comments.
Art
Art,
The degree of risk we are incurring is directly related to the implied volatility of the underlying securities.
We, actually, do not need to look up IV stats because the IV is directly related to our premium % returns.
For example, a 1-month initial time-value return of 8% equates to a high IV (risk) security. An initial 1-month return of 2%, means a much lower IV (risk) stock or ETF.
I set my monthly initial time-value return goal range between 2% – 4%. This will allow me to be structure low-risk trades that meet my pre-stated time-value goals.
For those with lower personal risk-tolerance, set your range lower; and vice-versa.
Alan
Premium members:
This week’s 4-page report of top-performing ETFs has been uploaded to your premium site. The Select Sector SPDR section is now crafted to align with our streamlined (CEO) approach to covered call writing. The report also lists Top-performing ETFs with Weekly options, mid-week market tone as well as the implied volatility of all eligible candidates.
Premium member video link:
https://youtu.be/EXMO-KwZuJs
For your convenience, here is the link to login to the premium site:
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Alan and the BCI team